By Robert D. Smith, industry advisor at Pricefx
The chemical and process industry sector is not immune to the coronavirus. In fact, if you’re in those fields, the coronavirus has likely attacked your business plan for 2020. Your goals and targets may be toast. Demand may be dramatically down, unless your business is hand sanitizers, food packaging, medical devices, or face masks.
Forecasts are worthless. Uncertainty is all that is certain. What do you do next?
It’s time to regroup. While the impact of this pandemic will not be known for some time, there are past crisis events that serve as learning opportunities to help with planning, strategies and tactics for the remainder of 2020, as the reset button is hit on goals and objectives. The 2008 economic downturn and hurricanes that hit the US Gulf Coast can provide insight into how to address the current economic uncertainty.
Here, find some do’s and don’ts to be mindful of in the current crisis, based on learnings from these past events.
Do...Resist the temptation to keep capacity utilization at normal levels. Just as sellers always want to sell more, operations teams are judged by making more product. However, in the current environment, plans that optimize total contribution margins will win. Expect internal resistance to shutting or slowing down manufacturing assets in the face of declining demand. Understand the cost structure of different operating scenarios in tandem with the expected revenue outcomes for available sales in a depressed market. Look at the overall picture of projected revenues and costs to arrive at the best operating strategy rather than defaulting to maximizing capacity utilization.
Don’t…Chase imaginary volumes. While sales volumes may have declined significantly for your customers, your competitors are experiencing the same issue. Rather than reacting by lowering price, maintain very close communication with customers to understand demand and continue to keep your share of business. Be vigilant about defending key, strategic accounts in the face of price competition. Don’t be an aggressor at other accounts.
Do…Seek price stability, unless in commodity markets where raw-material transparency drives reductions or allows increases in price. Customers will leverage price information on commodity raw materials to demand price concessions. Price stability should be sought in the current crisis unless compelling factors exist to drive change. If price transparency on raw materials drives reductions, ensure they are in line with the public information and avoid reductions that shrink margins. Also, note the impact of freight and distribution costs and drive increases to recoup these—your customers will be seeing the same and should acknowledge the need. Should product shortages exist, have sales controls and allocation plans in place to protect contract and strategic customers before addressing spot or new opportunities.
Don’t…Steal share in mature markets, which leads to price wars. In mature markets, assume that capacity share equals market share unless significant differential advantage exists across competitors. Seeking to recoup volume losses by taking share from competitors will trigger a like reaction from the competitor, using the only lever they have available—a price reduction. At some point, all competitors will reach equilibrium on volume that will mimic capacity share at the end of this price war, but with lower prices and smaller margins than they started with. The price war punishes all market participants and drives total earnings even lower than the volume loss would dictate.
Do…Prepare for market stabilization. There will be an end to the crisis and a brighter day. Position your firm for this by having supply ready for the upturn, which may come upon us as quickly as the downturn. Leverage storage facilities, warehouses and distribution channels to be as full as working capital limits can tolerate so your firm won’t miss out on opportunities when the upturn arrives.
Do…Focus on per-unit variable-margin metrics. Keep a focus on unit margins to ensure readiness for the upturn. Don’t let cost increases or price reductions nibble away at these. Total volume or revenue targets are out the window for now, but unit-margin metrics can steer the ship well during this time of uncertainty.
Be proactive in addressing these issues to maximize contribution margins and your readiness for the upturn we are all waiting for.